Author: Crosenfield Date: 12/11/00 10:29 AM Number: 26532 I agree with Mark. If you do a custodian-to-custodian transfer there isn't any 10% penalty or taxes on capital gains. First you set up the IRA with Vanguard. They will send you paperwork to do the transfer. Your existing custodian may charge you an exit fee of $50 or so. Then you liquidate whatever of the existing investments you wish (or do this before the transfer, depending on whose commissions are lower). Then buy the Vanguard Index fund with the proceeds. An IRA is a box. As long as you leave money in it there are no taxes on dividends, capital gains or anything else. At 70 1/2 you must start taking money out, and pay taxes on it.Once at Vanguard, you can convert the same account to a Roth if you wish. If you are converting all at once, it would be just a change in account number and you pay the taxes on amount of gains converted. Or you can convert just part and leave the rest in a traditional IRA. Best wishes, Chris

Chris,

Thanks for your comments, but I guess I was not clear on what I'm trying to do.

I am trying to find a way to get this money OUT of my current nondeductable traditional IRA, because I have done calculations that show that VTGIX may actually do better than a nondeductable IRA (which is all that I am eligible for).

By owning VTGIX outside an IRA, distributions are no longer sheltered, but when liquidating, I can take advantage of long term capital gains rates, which I cannot do if the fund is held in an IRA.

I have looked closely at VTGIX, which is essentially a tax managed S&P500 Index Fund, and found its expense ratio is 0.19%, and its historical distribution have been about 0.9% per year. This results in a total cost of ownership, when held outside a tax shelter, of about 0.28%, which is unbelievably low. If the fund were held in an IRA, the expense ratio cost would be the same, but there would be no current tax due on the 0.9% distributions. I believe the tax cost on the distributions can be easily beaten by the reduced tax benefit afforded by long term capital gains in retirement.

Therefore, I have concluded that it is better to own VTGIX outside an IRA than to hold any S&P500 Index Fund inside an IRA. Now, I'm trying to understand all the penalties and tax issues if I withdraw my money from my current nondeductable traditional IRA. During this past year I have incurred substantial losses, and may have a low enough overall capital gain, now, that my taxes and penalties won't be too bad. That's what I'm studying currently.

The only negative issue with VTGIX that I can find is that you have to hold it for five years before a back-end load of 1% goes away, but that will not be a problem for me.

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